The cost arising out of the failure of the customers to meet their obligations when payment on credit sales become due after the expiry of the credit period, may be attributed to which one of the following ?
Delinquency Cost
Option 3 — Delinquency Cost is correct.
In receivables (accounts-receivable) management, the costs of extending credit are usually grouped into collection costs, delinquency costs and default costs. Delinquency cost is the cost that arises when a customer fails to pay on the due date and the payment becomes overdue — that is, after the credit period has expired but before the account is written off. It includes the extra cost of chasing overdue accounts (reminders, follow-up, blocking of funds and interest on the delayed amount).
The key phrase in the stem is “fails to meet obligations when payment becomes due after the expiry of the credit period.” Delinquency = overdue but potentially still collectible, which precisely fits this description.
| Cost | When it arises |
|---|---|
| Collection cost | Administrative cost of running the credit and collection department |
| Delinquency cost | Customer is late / overdue after the credit period expires |
| Default cost | Amount becomes irrecoverable (bad debt) and is written off |
Why the other options are wrong: Collection cost is the routine administrative cost, not a cost of overdue payment; default cost is the loss when the debt is finally uncollectible (bad debt); attrition cost relates to loss of customers, not to overdue receivables.
Takeaway: overdue-but-not-yet-written-off receivables generate delinquency cost.
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